Former Federal Reserve Economist Gordon: Why I left the Federal Reserve and joined Uniswap

On January 22, former Federal Reserve economist Gordon Liao joined Uniswap Labs and wrote about his journey on Twitter.

Coming from a background in centralized finance, I am most excited about innovations that have the potential to build a better, more secure, and more accessible financial system.

At the Fed, I was amazed at how much of the world economy depended on so few intermediaries, e.g., 24 primary dealers handling all Treasury auctions, 8 U.S. government interbank banks providing most of the dollar-based liquidity to the world, and 1 single bank (the Bank of New York) clearing all tri-party repo.

When functioning well, these established financial giants move trillions of dollars in transactions every day, but balance sheet frictions and increased asset holdings following the global financial crisis have led to frequent problems with the current financial architecture.

Even in the central arteries of the financial system, financial frictions are high. A classic example is the periodic and sporadic spikes in funding rates, the largest of which in September 2019 led to the early end of the Fed’s last round of balance sheet reduction.

Financial frictions are not just a matter of market access; they are so important that economists have created an entire subfield, intermediate asset pricing, to study the frictions of intermediating finance.

How will web3/DeFi improve the intermediary problem of traditional finance? In short, by making finance disintermediate, composable, and more transparent. If there is demand, I can write some content about these ideas separately below:

First, DeFi is transparent. Anyone can audit not only the smart contract code, but also the entire transaction history. This level of transparency promotes innovation and reduces risks in the long run.

Second, web3 reduces concentrations of economic power and single points of failure. As a former FICC trader, I am still shocked that the largest interest rate markets are often at the mercy of a small number of traders.

Third, web3 breaks down different boundaries, reduces fragmentation, and realizes a truly efficient global financial system.

Fourth, the transparency of blockchain transactions can ultimately reduce the risk of money laundering and facilitate the secure flow and transaction of value around the world.

Building a safer, more inclusive, and more efficient financial system requires the joint efforts of technologists, economists, and policymakers.